However, the federal tax credit is subject to a complex phase-out rule that may reduce or eliminate the tax break based on how many sales are made by a given manufacturer. The vehicles of two manufacturers have already begun to be phased out, which means they now qualify for only a partial tax credit.
Tax Credit Basics
You can claim the federal tax credit for buying a qualifying new (not used) plug-in EV. The credit can be worth up to $7,500. There are no income restrictions, so even wealthy people can qualify.
A qualifying vehicle can be either fully electric or a plug-in electric-gasoline hybrid. In addition, the vehicle must be purchased rather than leased, because the credit for a leased vehicle belongs to the manufacturer.
The credit equals $2,500 for a vehicle powered by a four-kilowatt-hour battery, with an additional $417 for each kilowatt hour of battery capacity beyond four hours. The maximum credit is $7,500. Buyers of qualifying vehicles can rely on the manufacturer’s or distributor’s certification of the allowable credit amount.
How the Phase-Out Rule Works
The credit begins phasing out for a manufacturer over four calendar quarters once it sells more than 200,000 qualifying vehicles for use in the United States. The IRS recently announced that GM had sold more than 200,000 qualifying vehicles through the fourth quarter of 2018. So, the phase-out rule has been triggered for GM vehicles, as of April 1, 2019. The credit for GM vehicles purchased between April 1, 2019 and September 30, 2019 is reduced to 50% of the otherwise allowable amount. For GM vehicles purchased between October 1, 2019 and March 31, 2020, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for GM vehicles purchased after March 31, 2020.
The IRS previously announced that Tesla had sold more than 200,000 qualifying vehicles through the third quarter of 2018. So, the phase-out rule was triggered for Tesla vehicles effective as of January 1, 2019. The credit for Tesla vehicles purchased between January 1, 2019 and June 30, 2019 is reduced to 50% of the otherwise allowable amount. For Tesla vehicles purchased between July 1, 2019 and December 31, 2019, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for Tesla vehicles purchased after December 31, 2019.
Despite the phase-out kicking in for GM and Tesla vehicles, there are still many other EVs on the market if you’re interested in purchasing one. For an index of manufacturers and credit amounts, visit this IRS Web page: https://bit.ly/2vqC8vM. Contact us if you want more information about the tax breaks that may be available for these vehicles.